Borrowers in financial difficulty: FCA research report highlights areas of improvement for lenders

Why was the research report commissioned by the FCA?

The research report reiterates that ensuring borrowers get the right help and support when they get into financial difficulty remains one of the FCA’s key priorities. While the FCA’s Financial Lives Survey (FLS) provides insight into how many people face financial difficulties, and how many contact their lenders or seek debt advice, the research report (commissioned from Yonder Consulting) aimed to explore what the experience of seeking support is like and what barriers stop borrowers from accessing the support that is available.

As part of the research, 2,969 UK borrowers in financial difficulty were surveyed, and seven interviews with representatives of consumer support and advice organisations and 48 in-depth interviews with borrowers in financial difficulty were conducted between October 2021 and March 2022.

A broad definition of ‘financial difficulty’

For the purposes of the report, ‘financial difficulty’ is defined more broadly than usual to refer to consumers who have one or more credit or mortgage products, provided by a firm regulated by the FCA and who have missed any payments, find bills a heavy burden, sought debt advice, or borrowed on one loan specifically to make payments on another. This was to ensure that the research captured people who were on the cusp of missing their payments, to give a wider view of the perspectives of borrowers in financial difficulty.

From the screening figures for the survey, Yonder Consulting estimate that in the region of approximately 15% of UK adults were borrowers in financial difficulty. This equated to approximately 7.8m UK adults. However, it is made clear that these figures should be used for guidance only and should not be directly compared with the FLS data in this area, given different sample composition, qualifying criteria and methodology. It is also worth bearing in mind that the research was carried out in relation to a very small sample of borrowers, as set out above.

Vulnerable customers and financial difficulty: Joining the dots

The link with vulnerability is clear: overall 56% of borrowers in financial difficulty had experienced a negative life event (e.g. a cancer diagnosis, losing their job, divorce, poor mental health) in the preceding 12 months, compared to 29% of the population as a whole as of October 2020 (FLS 2020: the impact of coronavirus, 11 February 2021, page 68).These personal issues were often cited as reasons why borrowers in financial difficulty didn’t contact lenders or reach out for support with their financial situation.

Not just a snapshot of the impact of the COVID-19 pandemic

While the timing means that borrowers’ most recent experiences with financial difficulty are in the context of the COVID-19 pandemic (not the cost of living crisis), the report states that the research was developed to capture needs, behaviours and experiences beyond this period. This means that, going forward, lenders should take note of its insights in relation to borrowers in financial difficulty more generally.

Could do better: Areas for improvement for lenders

The research findings suggest:

There is scope for more activity on the part of lenders to engage with borrowers in financial difficulty, to challenge misconceptions, and to explain the options open to them

Over half of borrowers in financial difficulty did not have a good understanding of what their options were. In addition, misunderstandings about the impact on their credit file drove potentially harmful behaviours.

Tackling the need for more engagement with borrowers in financial difficulty will also mean tackling the barriers to contacting lenders that were identified through the research. Only 34% of all borrowers in financial difficulty agreed that lenders were approachable and sympathetic to those in difficulty. Similarly, 38% said they were comfortable talking to lenders if they were having trouble making payments, and only 37% would consider their lender to be a trusted source of information about ways to better manage their finances. The report describes these findings as ‘key in understanding why many consumers do not want to contact their lenders when they are in difficulty.’

In addition, the report found that concerns about the impact on credit files by talking to lenders were ‘relatively widespread’. Almost half (47%) of all borrowers in financial difficulty mistakenly believed that the simple act of contacting lenders would have an impact on their credit file (although 60% of those who had contact with their lender recalled that their lender explained how missing payments and seeking support would be recorded on their credit file). The report found that 16% of borrowers ignored contact from lenders because of this misconception.

Lenders are not always collecting the information required to offer appropriate solutions for individual consumers

Only 52% of borrowers in financial difficulty recalled being asked about their financial circumstances, while slightly fewer were asked how much they could afford to pay (49%) or asked about their personal circumstances (44%). Just two in five (41%) were asked why they couldn’t afford to pay.

There is room for improvement in how forbearance works in practice in terms of staff training, QA, effective use of automation and/or ensuring oversight

Of those borrowers who had contact with lenders, two out of five reported negative experiences largely based on their experiences with the staff they spoke to, and fewer than half (43%) felt their overall financial position had improved.

Lenders need to do more to refer their customers who would benefit from debt advice and to support customers in debt advice

Mentioning debt advice at the bottom of letters or as part of a telephone conversation is not enough of a prompt. Nine in ten (87%) of borrowers in financial difficulty who did not immediately seek help claimed that they could have been persuaded to seek debt advice sooner, although those aged 55 and over were slightly less likely (83%) to feel they could have been persuaded to do so. Information on what debt advice is and how it can help was the primary factor that would encourage borrowers in financial difficulty to seek help sooner (53%), and this did not vary across demographics and groups of interest.

Consumers in financial difficulty should help themselves…by contacting their lenders

The survey findings in the report reinforce that borrowers in financial difficulty were likely to have reached crisis point before contacting their lender. Half of those with five or more credit products (50%) and two-fifths of those who owed more than £15,000 (38%) had contacted their lender about their difficulties with payments relating to their regulated credit or mortgages, their domestic bills or both.

The key message from the FCA and MoneyHelper press release which announced the report’s publication is that consumers should face up to their financial difficulties and seek help sooner rather than later. Both bodies are therefore urging consumers to contact their lender if they are struggling to make payments. There is reference to the recent FCA Dear CEO letter to lenders reminding them of how they should provide customers with help and support that takes account of their individual needs and circumstance if they are struggling with their payments (including agreeing reduced or no payments for a period, where appropriate).

The FCA and MoneyHelper’s ‘top tips’ for those in financial difficulty also include opening up to someone as soon as possible. Again, consumers are encouraged not to wait to contact their lender if they get into difficulty, and even to talk to them before missing a payment. The report states that only 13% of borrowers in financial difficulty proactively engaged with their lenders without having had any other form of lender contact to prompt them into action. This form of contact was highest among those contacting their lenders regarding mortgages (21%), personal loans (18%) and high-cost cash loans (17%).

Emphasis on operational resilience: Lenders need to be ready for increased volume of customers in financial difficulty

In light of the above guidance to consumers, lenders should take particular note of the FCA’s emphasis on the need for firms to ensure:

• their policies and processes are fit for the current cost of living pressures; and
• they are fully prepared with experienced management and staff to cope with the potential increasing numbers of borrowers in financial difficulty,

which are some of the key takeaways from both its Dear CEO letter and the other recent portfolio letters on its supervisory strategy for Mainstream Consumer Credit Lenders (MCCLs), Lifetime Mortgage Providers and Debt Advice Firms. See this Engage article for more on the MCCLs letter.

With these points in mind, lenders should find the following research report findings of use when reviewing current policies, processes and resourcing:

• The majority (66%) of those borrowers in financial difficulty who contacted their provider did so by telephone. This was the most popular method, regardless of gender, age, ethnicity, working status, income, level of debt or credit products held. Those who were older and those with larger levels of debt favoured telephone even more (83% of those aged 55+ and 75% of those with debts of over £15,000).
• Lenders were mostly making contact with borrowers in financial difficulty via a mixture of email (59%) and telephone (56%), contrasting with the behaviour of borrowers and representing ‘an area of disconnect between consumers and lenders’. While nearly half of lenders communicated to borrowers in financial difficulty by letter (48%), just 8% of borrowers sent letters to their lender.
• However, talking on the telephone was a real barrier for those who lack confidence, eg for those for whom English is not their first language, or who had conditions which made it difficult for them (eg, a stutter, learning difficulties, or mental health issues like anxiety). Another barrier to using the telephone was the expected waiting and call times, which was especially problematic if trying to call during working hours.
• There were a number of borrowers in financial difficulty who used email (28%) or web chat (19%) to contact their providers. But these online contact methods were preferred when seeking specific information or when dealing with more straight-forward issues.
• No “one-size-fits-all” approach will work, and consideration should be given to individuals’ circumstances to determine the best method for contact.
• Experiences of dealing with lenders varied depending on the experience or capability of the individual spoken to at the lender. Participants mentioned having mixed experiences, even when dealing with the same lender, perceived to be based on an inconsistency in knowledge and skills and capability.

Next steps

Lenders may find it helpful to consider the following summary list from the research report. It includes both consumer and expert views of where lenders could improve the experience of making contact when in financial difficulty:

1. Improving the interpersonal aspect, ensuring that staff are always able to deal with customers in a way which imparts empathy, sympathy, tone of voice.
2. Improving consistency within the organisation, so customers feel assured that when they come back to a different person, the level of service and understanding will be the same. 
3. Providing a clear outline of the impact of the solution being offered on their credit rating, future payments and remaining debt, to ensure affordability in the future. 
4. Ensuring that as much as possible of the customer’s personal and unique situation is taken into account, with reassurances around the impact of sharing this information. 
5. Where a customer has reached out, ensuring that follow-ups are made to review, not to chase. This serves to reassure and shows the lender has ‘listened’.
6. Having a dedicated number, not just a call centre leading to a lengthy wait.

Many of these recommendations can be implemented through improved training and better operationalising of policies. Our Consulting team are currently working with a number of lenders to help them take regulatory requirements and translate them into efficient and effective processes and controls which work for their First Line teams.

The FCA’s Borrowers in Financial Difficulty project is ongoing. It expects to collate and publish its findings in the second half of 2022.

Please get in touch with any of the listed contacts if you would like to discuss the potential impact of the research report’s findings for your business.

Authored by James Black and Virginia Montgomery.